Currency View by OFX

Last week’s news

• The Federal Reserve projected no interest rate increases until at least the end of 2023, indicating it would not tighten policy until inflation stays above 2% ‘for some time’. The FOMC continued the dovish long-term stance that was shared last month and is likely to translate into rock-bottom interest rates for years to come. According to median Fed forecasts, US output will contract by 3.7% this year, with unemployment falling to 7.6% by the end of the year. Fed chair Mr Powell said on a press conference forecasts assumed additional fiscal stimulus from Congress which is ‘likely to be needed’.
• The resurgence of COVID-19 across Europe is likely to slow the UK’s economic recovery which has been exceeding expectations according to the Bank of England’s rate setting committee. They unanimously voted to hold rates at 0.1% and the level of quantitative easing at £745bn however the Monetary Policy Committee issued a warning that COVID-19 and an uncertain end to the Brexit transition period threatened the UK economy. If a further downturn arose in the UK economy the BoE indicated that it would now be in a better position to use negative interest rates as part of the toolkit. Although they made no comment on whether they were more inclined to use them, the consensus view was that the BoE was confirming expectations interest rates are now likely to move into negative territory early next year.
• The US hit the pause button when it called off tariffs on Canadian aluminium, agreeing to withdraw current penalties until after the presidential election in November. Canada was ready to impose a wide range of retaliatory measures at 3:00 pm EST last Tuesday that would have hit some politically inconvenient targets for President Trump as he seeks re-election. The US said it would drop its recently imposed 10% import tax on Canadian aluminium and review the issue every month.
• Ursula von der Leyen, the President of the European Commission, stated last Thursday that she was convinced a trade deal with the UK was still possible despite the ‘distraction’ caused by Boris Johnson’s move to violate the Brexit withdrawal treaty. She stated that EU-UK talks should continue, stating ‘it is better not to have this distraction questioning an existing international agreement that we have, but to focus on getting this deal done, this agreement done’. Her comments reflect the EU’s commitment to keep trade talks alive with the UK and finalise a deal before the end of the deadline this year.

Looking ahead

• Both the NZD and AUD have been outperforming other major counterparties recently, especially the USD, despite the last correction seen in equities. The NZD gained more than 1.4% last week almost reaching 0.68 on Friday, and the AUD was able to hold to its recent gains, staying above 0.73. A combination of factors, including a weaker USD and a relatively better post-pandemic recovery, are weighting on both Asia-pacific currencies. On the other hand, Central Bank authorities have been seemingly unaffected, but this could change at any point. On Tuesday, we’ll hear from the current RBA governor speaking on Monetary Policy while the RBNZ meets on Wednesday.
• The Euro weakened over the last week. It fell 1%, 0.05%, and 0.14% versus the GBP, USD, and AUD. It seems like ECB officials’ verbal interventions are working out in the short-term. The ECB’s verbal campaign ramped up when Chief Economist Philip Lane flagged Euro strength, followed by Christine Lagarde and Vice President Luis de Guindos mentioning the importance of a weaker Euro. However, the Fed’s tools to continue with an ultra-dovish posture continue weighting on the USD.
• The ECB has not unilaterally intervened in the foreign exchange market since 2000, but they might have less room to manoeuvre than the FOMC. Technically speaking, the EUR/USD pair has been trading in a range between the mid-1.17s and the low 1.2000s since the end of July. Any price action beyond these two levels might indicate a new trend.
• The Fed has incorporated their new average inflation targeting (AIT) framework into its guidance on how long rates will stay near the zero-lower bound. For now, the Fed shows its typical ambiguity that every central bank needs to have to manage expectations. The vague standpoint of the Fed has intentionally created some confusion regarding its approach to the AIT discussion. The only thing we know for sure is that average inflation means somewhere around 2%. We can expect that the Fed will soon clarify and communicate more on AIT, which, in our opinion, does not qualify as a dovish stance. However, for now, all the pundits call it a dovish approach. We would rather be a bit more sceptical about dovishness, which implies a weak USD in the short-term.

Key market events this week

• EUR Consumer confidence (Sept)- Tuesday
• AUD preliminary retail sales- Wednesday
• RBNZ Interest Rate Decision- Wednesday
• EUR Markit Manufacturing PMI (Sept)- Wednesday
• GBP Markit Manufacturing PMI (Sept)- Wednesday
• USD Markit Manufacturing PMI (Sept)- Wednesday
• SNB Interest Rate Decision- Wednesday
• USD Durable Goods Orders MoM (Aug)- Thursday